Often
the difference between a winning product and a loser is how you price it.
Sales tests have shown that price is one of the most compelling factors that
determine the success of a sale. Readership surveys have shown that
readers will often skip copy just to get to the bottom of the advertisement to
find out the price.

The
Four P's of Marketing

For those of you who
have studied marketing in school, you’ll remember the Four P’s of Marketing,
(1) Product, (2) Place, (3) Promotion, and (4) Price. These four elements
of marketing together determine the success of your product or service.

When determining a
strategy for a profitable business you should ask yourself four critical
questions as a result of the Four P’s…

1.How can I improve my product?

2.How do I get it from point A to point B?

3.How do I tell people about it?

4.How much should I charge for it?

The first three
questions all have a cost associated with them. Only the fourth question
actually determines how much money you’ll bring in. So pricing is a
critical question that should be considered carefully.

What
Is Your Objective?

When pricing your
product or service you must always have an objective in mind. Knowing your
objective will have a huge impact on the final price you set. It is true
that the ultimate objective of you price is to make the most money possible.
However, there are different routes to reach that objective.

For example, the
following are six pricing strategies to meet certain objectives. Each
strategy will, perhaps, result in a radically different price to meet the
objectives of the business.

Strategy #1-
Pricing low to penetrate the market and gain customers.

Objective –
Perhaps you’re just entering the market with a new product and you want to
gain as many customers as possible.

When to Use
– If you have a big “backend” product that you plan to sell as a follow up
to the lower priced “front-end” product. Or it might be that you have
a consumable product that people will buy over and over again so you want to
gain customers, get them hooked on your product or service, and then slowly
raise the price.

Strategy #2 -
Pricing high to skim maximum profits.

Objective –
To gain the maximum amount of profit per unit in the shortest amount of time.

When to Use –
When your product is unique and new with no competition and you have a short
window to skim the maximum profits before knock-offs start flooding the market.

Strategy #3
- Pricing low to crush the competition.

Objective – You
want to squeeze your competition out of the marketplace so they no longer
compete with you.

When to Use
– Your product is a perceived commodity and you have one or two competitors
with which you are constantly having price battles. (By the way,
technically this practice is illegal)

Strategy #4
- Pricing to make a “normal” profit.

Objective
– To set a price that is seen by your customer as honest and reasonable.

When to Use
– You may be on contract (such as a government contract) with a customer that
you have a long-term relationship with and whose trust you value immensely (and
who does periodic audits on your books). In this case you might use a
cost-plus pricing strategy.

Strategy #5
- Pricing to the market to be competitive.

Objective
– When you want your stay competitive and be considered for any proposal,
bidding, auction or other competitive pricing situations.

When to Use
– When your product is very similar to your competitor’s and you are limited
in the methods you can use to differentiate it.

Strategy #6
- Pricing for maximum profit and maximum sales.

Objective
– You want to get the maximum amount of profit possible but not at the expense
of losing customers.

When to Use
– After your initial introduction and you have the ability to differentiate
your product.

Hopefully after
reviewing these six strategies you realize that your price is not just a
function of the cost to produce your product or deliver your service but is more
a function of what you’re trying to achieve.

Pricing
Myths Exposed

There are a lot of
myths out there about pricing your product or service an some fly directly in
the face of popular thinking (and what I’ve stated in the previous section).

Myth # 1–
Price is the consumer’s most important buying
criteria.

Truth –
Yes, price is important but it is no way the most important criteria for a
shopper. I’ve never seen one study that has shown price to be the most
important buying criteria for a consumer. In fact, most studies I’ve
reviewed show price to come up around fourth place on the importance list.

Just look at those who
pay exorbitant prices to buy brand clothing such as Ralph Lauren or Tommy
Hilfiger. How about those who buy goods at the local gas station or 7-11
store whose prices are astronomical. Remember the Cabbage Patch Doll or
the Tickle-Me-Elmo craze? Prices went sky high because the demand was so
high for them.

Even if you have a
product that you think is a commodity, there are a myriad of other ways to
differentiate your product or service so that you can charge a higher price
(which leads me to the next myth).

Myth # 2 – You
have to match or slightly under price your product or service in a commodity
driven or competitive market.

Truth –
There are so many ways to differentiate your product or service that it baffles
me why businesses continue to believe this myth. Here are just a few ways
you can differentiate yourself:

Specializing
in a particular niche

Adding
bonuses or premiums

Delivering
it faster

Touting
your experience or credentials

Showing
successful case studies

Having
others testify to your differentiation

Limiting
distribution or accessibility

Partnering
with heavy-hitters

Having
extreme guarantees

Etc.
etc. etc.

There are a myriad of
ways to differentiate your product or service. All it takes is a bit of
creativity and some good marketing. You should never have to just accept
the prevailing price of a product. Price-takers get eaten up and spit out.
Price-makers spend their vacations in Hawaii.

Myth # 3 – Pricing
is a simple matter of taking the cost of your product or service and marking up
your desired profit margin.

Truth –
The fact is that most businesses don’t know their costs so even if they wanted
to do cost-plus pricing they couldn’t. If you don’t know your cost how
can you “mark up” your price? In addition, the cost-plus price may
have nothing to do with the value you provide or the market price of your
product or service.

Even though you may not
be able to determine your price, you should be able to approximate it.
It’s better to be approximately wrong than to be precisely right. In any
pricing scenario, you must know the approximate cost of your service so that if
you are losing money, at least you know it and it is part of your strategy.

Myth # 4 – If
sales are lagging just drop your price and sales will increase.

Truth
- Just open the paper and count the number of times you read the word,
“sale.” The truth is that people do put a high value on price but they
also put a high value on quality and when you lower your price you cheapen the
perception of your quality.

If you lower your
prices just to increase sales you should have a good reason. If you
believe you’ll be able to upsell your new customers or you believe that can
backend them with bigger offers then your strategy is justifiable. But if
you just lower your prices to increase sales you could be just speeding up your
losses.

Price
is a Perception of Value

It’s important to
remember that you must sell your product or service at a price that is higher
than your cost to produce and promote it. That’s called a profit.
But perhaps, even more important is knowing that your customer will only buy
your product or service if they determine that its perceived value exceeds the
price they have to pay to receive it.

Price is a perception
of value and has little to do with actual value. The whole goal of your
marketing efforts is to spread the word and convince people that the value is
higher than the price they are being asked to pay.

I’ll never forget a
story I once heard about a fellow who approached the legendary
marketer/copywriter Gary Halbert to ask about the seemingly high price he was
planning to charge for his new product. He asked Gary, “Do you think
people will pay $XX dollars for my new widget?” Gary’s reply is
profound and something you should always remember. He said, “I don’t
know. How good is the sales letter?”

I love this story
because it summarizes everything that is great about the power of good
marketing. Your product or service’s price has nothing to do with its
actual value. It has everything to do with it’s perceived value and how
well you can build that perception in the mind of a prospect using effective
marketing.

Testing
Price Points

All the price theory in
the world won’t tell you what your optimum price is until you let consumers
test it with their wallets. I remember Mark Nolan, author of “The
Instant Marketing Plan” once telling a story about how he sold 100,000 copies
of a book on free publicity he’d written for $29 a piece.

After selling a ton of
these books he had a conversation with another marketer who asked him if he had
tested his price at $49. Mark just stared at him as he realized that
he’d been so busy selling his book and things we’re going so well that he
hadn’t tested his price.

You should consider
starting your test with four price points:

1.What you think should be the price.

2.The highest possible price you can imagine, but one to which you think
that consumers would still respond.

3.A low price that is a great deal for the customer, but less than you want
to charge.

4.A fourth price that is outrageously high or low.

Holding everything else
constant, determine the sales from each price point. You’ll probably
find that the price that obtains the maximum sales and profitability is higher
than what you had originally intended.

You might also consider
price testing a combination offer. By this I mean, what combination of
items can I offer for the maximum sales at the highest price. This may be
more difficult in the real world but one the Internet it is simple.

Just send one stream of
prospects to a page with one combination and price and send a second set of
prospects to a second page with a different combination and price. The
combination could include different products bundles, different guarantees,
different service features etc.

Teeter
Point and the Six Questions

Ken Evoy, coauthor of “Make
Your Price Sell,” an online price determination product invented the term
“Teeter Point,” which he has even trademarked. The teeter point is the
price at which a consumer just can’t make up their mind. It’s the
point at which if the price was raised a dollar you’d lose the sale and if it
was dropped you win the sale.

The trick of course if
find the teeter point. Ken asks two questions to two different groups of
people to find the teeter point.

Question # 1
– What price is almost too high to buy?

Question # 2
– What price is just a bit too high to buy?

If the median for
question # 1 is $50 and the median for question # 2 is $45, then your teeter
point is somewhere between $45 and $50.

To determine a
consumer’s buying habits Ken has asks two more questions.

Question # 3
– What is the price you usually spend for (product name)?

Question # 4
– How often do you buy (product name)?

This information is
important because it helps you determine what a consumer might expect to pay for
your product or service.

Other questions that
are asked in Ken’s price survey are:

Question # 5
– On a scale from one to seven, how unique is (product name)?

Question # 6
– On a scale from one to seven, how important is (product name)?

The more unique and
important your product and service, the higher the price you can attach to it.

The last question that
is asked is:

Question # 7
– What is a fair price for (product name)?

The respondent will
normally answer with a price that is lower than what they truly consider fair.
However, combined with the teeter point questions, you’ll have a good
indication the optimum price you can charge for the most sales.

Presenting
Your Price

Perhaps the only thing
more important than setting the right price is how you present it. The key
to presenting your price is to compare it with something that the consumer
perceives as relatively huge.

For instance, the
following techniques uses the compare / contrast method to give the perception
that your price is not only fair, but a great deal.

Technique # 1 – Volume
Method

Imagine you are
selling a course on how to stop smoking. Using this method your copy would
read something like this: “…you’d have to have 12 months of personal
smokers rehab counseling to get the same amount of coaching that you’ll find
in this course.”

Suppose you are selling
taxation consulting you could say “…in just one session you’ll learn
how to save more in taxes than you paid last year to the I.R.S.” Notice
how what you are giving them is compared to a much larger quantity, which has
the effect of making your.

Technique # 2 – Monthly
Installment Method

Offer to have your
customer pay low monthly installments rather than one hefty price, then just
advertise the monthly installment price. This gives the perception of a
low price. Recently I sold a mobile home and noticed that people didn’t
really care about the price of the home, they were more concerned about the
amount of the monthly payments.

Technique # 3 –
Individual Value Comparison

This method takes each
individual component of the offer, places a value on it and then adds it all up
for a total and then compares it to the asking price.

For instance, if you
were in the hotel business you might say this, “…your luggage carried to
your shuttle van (value - $15), a swift shuttle ride directly to your hotel
(value $35), your personal assistant to help you carry up your baggage and get
settled in (value $10), premium movie channels for your viewing pleasure ($12),
a relaxing overnight stay in your personal suite (value $189), and a hearty
breakfast in the morning ($15) for a total value of over $260…yours for only a
small investment of $99. You save over $160!

Technique # 4 – Pain
Avoidance Method

As a consultant I often
try to put a price tag on the problem to give my client a realistic picture of
what it is costing her to continue to do nothing. Then I compare it to my
relatively small fee for helping to rid her of that problem.

For instance, the
conversation might go like this…

David:
“Hmmm, so you have a theft problem in your stores?”

Client: “Yes,
it’s terrible”

David: “What
types of things are being stolen?”

Client: “Computers
and software mostly.”

David: “What
do you think the average price is for the computers and software being
stolen?”

Client: “The
computers cost around $1,200 and the software costs around $50.

David: “How
many are missing on a monthly basis?”

Client: “We
usually come up about five computers short and probably about 20 different
software packages are missing.”

David: “Now
this is happening in all your stores?”

Client: “Yes”

David: “Well,
let’s see. From what you told me you’re experiencing a shrink problem
of around $6,000 per store and you own 12 stores so you’re total shrink is
costing you around 60,000 a month overall.”

Client: “Yes”

David: “So,
in a year’s time you could have a million dollar problem.”

David: “Would
you be willing to invest $50,000 to get rid of you million dollar problem?”

Technique # 5 – “Most
– Some – But” Method

This technique is a
simple competitor comparison that gives the perception of rarity or exclusivity.

Example # 1 – Nail
Salon

Most upscale salons
you’ll pay $50 - $100.

Some popular salons you
may pay as little as $35 - $40.

But our low preferred
customer price is just $19.95.

Example # 2 – Jewelry
Store

Many jewelry stores
charge $200 - $300.

Some jewelers will
offer special as low as $99.

But, during our
Customer Appreciation sale you only pay $67.

This method is used to
dramatize the discounts or low price that you offer compared to other businesses
in your market.

Technique # 6 – “Reason
Why” Method

If you charge a very
high price or a very low price, both may be a bit hard to believe by consumers
who are used to paying a certain price. Telling the consumer why the price
is so high or so low helps to reconcile the price discrepancy and accept it as
reasonable.

Example # 1 – Inventory
Overstock

“Our prices
are so low because we goofed on our last inventory order and are now seriously
overstocked. If we don’t sell all our (product) we’ll have to file for
bankruptcy so we’re clearing out all our inventory at ridiculously low
prices.”

Example # 2 –
Custom Pool Builder

“Rainey
pools recruited a team of the most experienced pool design engineers in the
country to design each and every pool, down to the last nail. No expense
was spared. We have developed the pool industry’s most advanced software
at a cost of over half a million dollars to ensure that the surrounding
landscape blends in with the pool design to create your complete three
dimensional vision before anyone even steps foot on your soil. Our
advanced planning system takes every circumstance and detail into consideration
to guarantee that your project will be completed on time and on budget.
Lastly, we’ve scoured the eastern seaboard to find the most experienced pool
construction people whom we pay twice the industry average to create your
backyard masterpiece. With over millions of dollars worth of experience,
research, technology, and quality control, you’ll have the finest backyard
experience available anywhere in the world.”

Pricing
Rules for Rounding Off

How you end your price
has more to do with human psychology than practicality. People buy on
human emotion rather than rational logic. The following are several rules
developed by price expert Erin Mitchell, President of the Pricing Society (www.Pricing-Advisor.com).

Tip # 1
– For prices up to $10 use endings such as $.99 rather than $.95.
Customer’s reactions are the same for both price points and the $.99 garners
you four more cents. Also, prices ending in odd numbers such as .34 are
confusing to people and may cost you sales.

Tip # 2
– For prices from $10 to $100 the best ending to use is $.95 rather than $.99
because the $.99 is seen as a “greedy” price.

Tip # 4
– Pricing for professional services should be in whole numbers such as $150
rather than $139.95. It’s more professional and promotes dignity and
confidence in your fees and rates.

Advertise
Your Price?

I often get the
question of whether to advertise price or not. This has been an ongoing
debate for years. I recommend not advertising your price unless it is
surprisingly low. You’re limited as to what you can do to build value in
an average size advertisement. Displaying a high price without first
building value is a losing proposition.

If you’re running a
sale just advertise the discount amount rather than the price. For
instance, advertising “20% Off” or “Take $1,000 Off” rather than showing
the actual price can get people just as excited as showing a low price, without
showing the actual price.

Price
Gimmicks that Work

All you have to do is
open the paper to see a lot of price gimmicks that retailers use to lure people
into their business. I could have listed a dozen gimmicks but I’ve
limited it down to five common price gimmicks.

1. The $1.00
Gimmick

The $1.00 gimmick is my
favorite and is very powerful. It includes advertising a product for the
“almost free” price of $1.00. Tell you consumers to call or come in
and find out how to get your product for only $1.00.

Your average consumer
knows that this is a gimmick but it’s so intriguing that many come in just to
see what the catch is. This is especially effective if the $1.00 product
has value. Currently, a friend of mine is offering a marketing course to
insurance professionals for $1.00 using a postcard marketing campaign.

However, to get the
marketing course for $1.00 they must purchase his $300 marketing course.
Is it a gimmick…yes! Is it a good deal…absolutely! In fact, the
$1.00 course even more valuable than the $300 course, which is the key to
attracting prospects.

2. Bait and Switch
Gimmick

First of all the bait
and switch gimmick is illegal, nonetheless, it is still practiced. The
bait and switch gimmick advertises a very low price for a product and then when
the prospect comes in to buy it, the business has “sold out” and the
prospect is then steered toward a higher priced product.

3. The Down/Monthly
Payment Gimmick

Car dealerships are
famous for using the down payment / monthly payment gimmick. In act, I
have a newspaper advertisement as I sit here writing that says, “Used Cars to
Be Sold For As Low As $69 Plus TTL. Millions of Dollars in Unclaimed
Vehicles.”

Do you believe that
this car dealership is going to sell a car for $69? Of course not!
The $69 is a down payment; however, it is presented as the total price of the
auto. It is very convincing and many people flock to these car sales every
weekend.

The monthly payment
gimmick is done the same way. A low monthly payment is presented as though
it is the entire price of the product.

5.The Free Gimmick

The free gimmick is
great for giving away teaser or trial test products without losing your shirt.
If you’ve been watching television lately you’ve probably seen the CEO of
the Video Professor computer training company. They sell computer training
courses on CD-ROM.

The CEO offers you a
free CD-ROM of your choice. He says, “Why am I giving these away?
Because I know if you try just one of my CD-ROM training courses, you’ll come
back for more.” However, in small print you’ll see that he charges
$6.95 for shipping.

The $6.95 will not only
cover his shipping, but also the manufacturing cost of the CD-ROM. He
loses nothing in the offer. When you call up (like I did) you’ll find
out that they try to upsell you like crazy.

6. The
Shipping Charge Gimmick

A spin off of the Free
Gimmick is the shipping charge gimmick in which a low price is advertised.
But when the order is made an exorbitant shipping fee is charged. So the
real profit is hidden in the shipping fee.

There are no
restrictions on how much you can charge for shipping. The higher priced
product you buy the easier it is to hide profit in the shipping fee.

Successful
Discounting Strategies

Discounting can be a
powerful tool to close the sale. However, it is over used and entirely
abused. Consumers just expect a discount in our current retail
environment. Instead of discounting, business owners should consider
building value through adding low cost, high value bonuses and premiums to
entice customers to buy.

To make your discount
even more powerful it should be tied to a deadline. This introduces a
feeling of urgency, which motivates prospects to action.

With that said, let’s
review a few successful discounting strategies.

1. New Product
Introduction Discount

When introducing a new
product you may consider offering it to a select group of individuals on an
exclusive basis. This will jumpstart sales.

You might say something
like this, “For the next two days I’m offering this introductory discount of
40% off exclusively to my current customers. After this introductory
period, you’ll have to buy my product at the regular purchase price of $XX.
Hurry and take advantage of this special exclusive offer right now.”

Or you could introduce
it to the customers of a joint venture partner by having your partner say,
“…I wanted to let you in on an exclusive special offer on a new product that
my friend John Doe is coming out with this week. I had to twist his arm to
get him make this offer to my customers. He finally relented. Hurry
and take advantage of this deal while it lasts. I was fortunate enough to
get him to agree to extend to you such a significant price break.”

2. Quantity Tiered
Discounting

A quantity tiered
discount is one that increases with the volume of purchase. For instance,
if you buy three cans of peanuts you get a 10% discount. If you buy 10
cans you get a 12% discount. And if you buy 20 or more you get a full 15%
discount off the regular price.

Many consumer goods
companies do business this way. Unfortunately it creates erratic order
quantities and makes it difficult to predict future product demand. But
that’s another article.

3. Value Bundle
Discount

The value bundle
discount offers a lower total price for a bundle of products or services.
For instance, assume you were selling a membership as a preferred customer to
your clothing store you might offer…

1.A $50 coupon for shirts and slacks. (value = $50)

2.A $100 coupon for a suit. (value = $100)

3.One free tie. (value = $25)

4.One free pair of socks. (value = $8)

5.One year of free tailoring. (value = unlimited)

The total value of the
entire bundle of goods and services exceeds $183. Instead of offering each
of the goods separately you offer the entire bundle in a membership package for
$100. That’s a great value that would be tempting to anyone. But
because your markups are over 100% you still make a respectable profit.

4. Secret Code
Discount

The Secret Code
Discount is also one of my favorites because it gives a feeling of intrigue,
exclusivity, and excitement. The discount includes offering a coupon or
ticket with a secret code on it. You must go to the business’ website,
enter the secret code, which then takes you to a webpage containing a discount
coupon that you can print out that you carry into the store.

10
Stealth Ways to Increase Your Price

Ever wanted to increase
your prices in stealth mode? Here's 10 ways to generate more revenue
without making a public price increase announcement.

2.Increase
your minimum order sizes so that customers will have to meet a higher minimum
threshold to get their discounts.

3.Increase your delivery charge and start charging for any special services
related to delivery.

4.Start invoicing for repairs on serviced
equipment.

5.Bill your customer for any engineering and installation services that you
previously included in the purchase price.

6.Raise your prices for overtime on rushed orders.

7.Start aggressively collecting on overdue accounts from the past several
months.

8.Shift your sales mix to higher margin products
and service and start phasing out the lower margin items.

9.Begin to write stiff penalty clauses into all your contracts.

10.
Decrease the physical characteristics of the product or
remove services that you are now providing and continue to charge the same
prices.

Never
Compete On Price

Let me first say this,
and if you get nothing else from this article remember this, “Never compete
on price!”Never, never, never! It’s a losing
proposition for you and for your competitors. Okay, there’s always an
exception. If you have a substantial cost advantage that is virtually
impossible to duplicate then there might be a case for competing on a lower
price.

What usually ends up
happening is after you lower your price, your competitor is forced to lower
their price a little more, then you have to match the lower price and down it
goes. Every body loses (except for the customer).

Why compete on price
when there are so many avenues for differentiating you product or service?
It doesn’t make sense, or should I say cents.

Conclusion

Pricing is a key factor
in marketing and selling your product or service. Whatever price
your choose, make sure that you have an end objective in mind and that your
pricing strategy supports your end objective.

Don’t believe the
myths that are swirling around about pricing. In the end, price is simply
a perception of value. Build your value and charge higher prices.
Make sure that you do some testing on your price points or you might be missing
out on a lot of profits.

How you present your
price can be just as important as the price you choose. Always make a
comparison to something large that your customer can understand. Advertise
your price only if it’s very low or you can build value into the
advertisement.

Although some price
gimmicks may seem juvenile and down right dumb, never overestimate the
intelligence of the public. Not only do some price gimmicks work, but
discounting can also be a successful motivator…if done correctly.

Lastly, never compete
on price, unless you have a cost advantage that is near impossible to duplicate.
Competing on price is almost always a losing proposition.

David
Frey, President of Marketing
Best Practices Inc., a Houston-based small business marketing consulting
firm, is the senior editor of the Marketing Best Practices Newsletter featuring
small business marketing best practices.